PartyPoker

As you may have heard, a bill passed that would make playing online poker extremely difficult. The poker bill was attached to a port bill that was highly popular. So the poker bill easily went through even though there were a number of people against it (democrats). Anyway this bill will make it very hard for people to fund their poker account because it will stop banks and credit card companies from funding gambling sites. Contrary to my opinion and the state of California, poker is considered gambling.

As a result, partygaming, the company that owns the most popular online poker room, partypoker.com, said they are going to stop accepting real money play from US customers once Bush signs this bill into law. This seems a near certainty. Although he might get a bump up in opinion polls if he did veto it, but i doubt it. Anyway, since partypoker's revenue is primarily derived from US (77%), the stock tanked. It went down over 60% on Monday.

So, usually when stocks go down a lot it gets me interested to see if the stock is a good buy.

Partygaming trades around .75c-.80c in the US over the counter market. Partygaming doesn’t trade on the major US stock exchanges. It has around 4 billion outstanding shares, which gives it a market capitalization of around $3.2 billion. In the latest report, international revenue (not including US) was $150 million in the first 6 months of this year and it had grown 150% year over year from 2005. It was $60 million in the first half of 2005. Earning margins are very high, as you can imagine, around 50%.

If there is no growth from the first half of this year to the second half of this year, they will have international revenue of $150 million the second half or $300 million for the year. Last year the growth form first half to second half was 50%. So even if the growth is a reasonable 33% from first half to second half of this year, they will have international revenue of 200 million in the second half or $350 million for 2006. At 50% earnings margin, they will earn $175 million dollars or 4.5 c/share. That give you a p/e of .80/4.5 or around 18. This does not even include the US players who will get around the law and play.

A p/e of 18 is pretty good for a company that just experienced 150% growth. Also, partygaming is a cash cow. There is hardly any capital expenditure for growth. All you need to grow is to buy more servers, hire more people and spend some money on marketing. The rest of the cash can be used to pay dividends or buy back shares. Partygaming was just about to pay a 115 million dollar dividend before this law passed.

Also, if for some insane reason, this bill does not go through, the shares would really jump. They were on track to earn .20c this year. .80/.20 is a p/e of 4.

There is also a chance someday that the US would regulate online gambling like every other nation in the world. It would bring billions in tax revenue that could really be used by the government.

The downside of this stock is that competition for online gaming is immense. This could dampen margins in the future. Also, since the number of players playing on partypoker will significantly decrease, this might decrease the number of different types of poker games that they can offer. This will have a negative affect on international revenue. There will be one time charges because of the unwinding of the US operations. But this is not a long term issue.


But, overall this stock is worth investing in. It is hard to find a stock that has a p/e of less than 20 with 150% revenue growth. Poker is exploding all over the world like it has in the US and those markets still remain untapped. Partygaming seems to be in a good position to tap those markets.

I put in an order to buy today for 5,000 shares at .76c, but it didn’t go through. Ill try tomorrow.